It is worth taking stock of the earnings environment for the Australian equities market following on from the August reporting season. At the end of the day, the market is only likely to perform once the earnings environment improves sustainably. We may be seeing early signs of a turn, and the headwind from larger stocks on the market’s earning growth appears to be dissipating. After two very difficult years in FY15 and FY16, expected earnings growth for the large cap stocks has stabilised in FY17 .
Stability in prices of commodities that has been seen this calendar year will have to continue for FY17 earnings growth to hold up. The effects of policy stimulus globally, and in China more particularly, has been supporting demand for industrial commodities. OPEC’s desire to see higher oil prices also supports a more positive outlook.
The smaller cap stocks have demonstrated a more resilient earnings growth profile over FY16 and that trend appears to be continuing in this financial year thus far (chart below). There have been concerns in the market about small cap stocks but their earnings profile suggests that there is a good fundamental base for their outperformance.
With an improving earnings outlook for the Australian market, there is good reason to maintain cautious optimism for calendar 2017.
Commentary courtesy of Platypus Asset Management Pty Limited : (VIEW LINK)